You’ve probably heard it before a few dozen times: Your student loans are not dischargeable in bankruptcy. That’s been true ever since 2005 when the Bankruptcy Abuse Prevention and Consumer Protection Act went into action.
However, there is an “undue hardship exception” that’s important to know about — especially if you’re having serious financial problems. Congress was vague about exactly what constituted an “undue hardship,” so most bankruptcy courts (including the Sixth Circuit courts, which is where Michigan lies) have begun to use what is known as the Brunner test.
Here are the things that the court will consider under the Brunner test:
1. Have you already made a good-faith effort to repay your loans?
For example, did you make a few payments? Did you actively set up a payment plan before your hardship struck? If you haven’t made payments, have you tried to find a payment plan that would work for you?
2. Are you in the midst of circumstances that make it impossible for you to maintain a minimum standard of living and still repay your loans?
Note that the court is looking at a minimum standard of living — not merely the standard of living you’re accustomed to having. It may be necessary to show that you can’t repay your loans and still afford the basic necessities.
3. Is the situation likely to continue for the foreseeable future?
A temporary situation can be managed through forbearance or other measures. Only long-term hardship situations qualify for a bankruptcy discharge.
When could these circumstances apply? Consider the following example: You accumulate $100,000 in student loans over the course of your education and begin working in your field. You marry and have a couple of children. Unfortunately, one of your children has cerebral palsy and requires round-the-clock care. Your insurance runs through your wife’s employer, and her job is more stable than yours, so you abandon your career in order to care for your disabled child. Your wife’s income alone isn’t enough to cover your living expenses for your family and your student loans.
Don’t assume your student loans are not dischargeable until you’ve discussed your situation completely with an attorney who fully understands the bankruptcy system. You may be entitled to more relief than you think.